The ratings on Bayerische Hypo- und Vereinsbank AG (HVB) are based on the bank's good market position, mainly in domestic real estate lending, its overall sound, albeit weakened, asset quality, its stable and diversified funding sources, and its sound cost control. These factors are partly offset by modest profitability and capital levels, and a limited, although improving, diversification of revenues. The acquisition of Bank Austria AG (AA+/Negative/A-1+), the restructuring of its real estate business, and sluggish capital markets may delay an improvement in HVB's core profitability. With Allianz AG (AAA/Watch Neg/A-1+) expected to take over Dresdner Bank AG (AA-/Watch Dev/A-1+), HVB will close its ties with Munich Reinsurance Co. (local currency rating AAA/Stable/--), which would become HVB's largest shareholder. Both
